All eyes on Tinubu’s policy on market interest rates

PHILLIP ISAKPA IN LONDON, UK

After moving quickly on two of Nigeria’s longstanding but economy distorting opaque policies – multiple exchange rates and corruption ridden fuel subsidy – President Bola Ahmed Tinubu now has all eyes in the financial markets on him to unfold the full stack of his policy on market interest rates.

Analysts and investors, including bankers and everyone interested in fixed income earnings who are still expecting to position their investment portfolios for the remaining five months of 2023, are hoping that the President Tinubu administration will help them do this by providing a sense of the direction it wants to take on market interest rates. 

The groups of people wanting answers to the question: “What does the second half of 2023 hold for fixed income Naira savers?” are largely those who are choosing to hold T-bills and FGN bonds rather than equities?

The keen interest in how President Tinubu wants to move on market interest rates is being shaped by developments in the past – near and medium terms. According to analysts at Coronation Asset Management,  “the new administration of President Bola Ahmed Tinubu has only just announced its list of ministers. The new administration, therefore, has yet to announce its overarching policy on market interest rates. Taking risky assets may be the order of the day, but we need to keep a close eye on policy developments.”

For fixed income investors, analysts point to historical trends in the market that are enabling the cautious approach and the need to watch what Tinubu and his team will unveil in their policy plan for interest rates.

In an analyst note seen by Business A.M., Coronation Asset Management analysts wrote: “Nigerian fixed income savers have been without a risk-free fixed-income return above the rate of inflation since the fourth quarter of 2019, which is coming up to four years. Not surprisingly, they have taken risk assets in order to make headway away against inflation, with the NGX All-Share Index recording positive returns in 2020 (+50.03%), 2021 (+6.07%), 2022 (+19.98%) and 2023 year-to-date (+26.94%). Over the past three and a half years investors in the NGX All-Share Index would have beaten inflation, on average.”

Nearly four years without a risk-free fixed-income return above the rate of inflation simply shows how the past government had, indeed, not kept its eyes on the market. Or it just didn’t understand the market and didn’t care!

Money and capital market watchers say with a new government that moved quickly on two major areas in need of urgent reforms, and which suggested it was keen on the economy and market reforms, it is understandable why everyone is cautiously waiting to see in what direction the administration wishes to take the market.

A scenic insight provided by Coronation analysts also helps to give both context and understanding, especially in relation to past and very recent developments. 

In their note, the analysts wrote: “Over the past few months we have seen Nigerian banks become more liquid than they were before and an increase in bank liquidity has put downward pressure on T-bill yields. That was before last week [penultimate week] when there was a weak T-bill auction, T-bill rates moved back up and the Monetary Policy Committee (MPC) of the CBN put its official rate up 25bps to 18.75%. T-bill yields still remain well below inflation, but is there hope for Nigerian savers?”

Offering what seems like more context on what is at play in the market, the analysts noted that the current relationship between Nigerian risk-free returns and inflation again points to buying risky assets such as equities. 

But referring to development after the Monetary Policy Committee of the Central Bank of Nigeria met, they wrote: “Yet, … the CBN raised the Monetary Policy rate by 0.25% to 18.75% which suggests that it wishes to continue tackling inflation and a weak T-bill auction saw T-bill and FGN bond yields jump.” 

A global comparative review offered by the analysts helps the Nigerian investors to see how they fare in comparison with the experience of fixed income savers in other countries. 

Using a selection of African and Asian countries, they note that some of the countries are much richer than Nigeria in terms of nominal US dollar GDP per capita, for example South Africa and Thailand; and that others are comparable, for example India and Kenya. 

“All the countries in our selection have 1-year local-currency T-bill rates, or outstanding 1-year local-currency government bond yields, in excess of inflation. As a result, savers can simply invest in their governments’ fixed income securities to obtain inflation beating returns,” the analysts wrote.

They observed that a feature of the countries is that, largely, their currencies have either depreciated moderately against the US dollar over the past year, or appreciated (in the case of Thailand), noting that, “a risk-free rate in excess of the rate of inflation encourages savers to keep their money in the local currency rather than to exchange it for US dollars.”

While the above scenario offers possible positive outcomes, the analysts observed that there are other countries that are not so fortunate. 

“Pakistan’s 1-year T-bill rate is 22.99% but annual inflation rate is 29.40%. Its currency has depreciated by 21.88% against the US dollar over the past year. Ghana has a 1-year T-bill rate of 30.45% compared with an annual inflation rate of 42.50%. Its currency has depreciated by 24.51% against the US dollar over the past year,” the analysts stated in their note.